New Zealand's economy was in the red to the tune of NZ$718 million in October, Statistics New Zealand said today, with this trade deficit coming in NZ$268 million above the deficit forecast by economists. It's also way ahead of the NZ$226 million deficit recorded in the same month last year.
The deficit came as the value of exports dropped NZ$423 million, or 11%, to NZ$3.5 billion last month compared with October last year. Economists noted the monthly deficit was way above the NZ$450 million consensus of their expectations. Westpac economists suggested it would rise even higher in coming months due to Christchurch rebuild related imports, and BNZ economist Doug Steel contrasted the 11% annual drop in export values with a 33% rise in house sales, saying this provided a vivid illustration of the current imbalances.
"Cue broken record: beware the deteriorating external accounts," said Steel, who predicts the current account deficit will rise above 6% of Gross Domestic Product (GDP) next year.
Statistics NZ industry and labour statistics manager Louise Holmes-Oliver said almost half the fall in export values was due to falling dairy values, which came despite an increase in dairy volume. Meanwhile, the value of imports rose NZ$70 million, or 1.7%. Contributing to this rise were capital goods, up NZ$94 million, and consumption goods, up NZ$64 million.
"The trade balance for October 2012 was a deficit of NZ$718 million, 21% of exports. This compares with a deficit of NZ$226 million, 5.8% of exports, in October 2011," Holmes-Oliver said.
The October deficit follows a similar sized one in September, NZ$791 million equivalent to 24% of exports. The annual October year trade deficit came in at NZ$1.367 billion, versus a deficit of NZ$875 million in the year to October 2011.
Statistics NZ also said seasonally adjusted exports fell 14% month-on-month in October led by a large fall in milk powder, butter, and cheese exports, following on from two large drops in August and September. Seasonally adjusted imports fell 8% in October.
"The trend for exports remains at a high level, but is 6.3% lower than its peak of November 2011. The trend for imports has shown little change in recent months, and is now 7% lower than its record high of September 2008," Holmes-Oliver said.
Much bigger deficit than expected
ASB economist Jane Turner said the deficit was much bigger than the NZ$450 million deficit expected by economists.
"The surprise was due to weaker than expected exports. This is due to lower shipments of aluminium (largely due to timing of shipments), as well as a decline in export volumes of dairy and meat. The seasonally-adjusted balance posted a deficit of NZ$313 million, led by a 14% decline in seasonally-adjusted exports. The decline was led by a 50% fall in aluminium export volumes, which appear to be disrupted by the timing of shipments," Turner said.
"This follows a 9% decline in the previous month. Beyond the shipment disruption there may have been some production cut backs, responding to lower international prices. Dairy exports fell 15% over October due to lower volumes."
Turner also said a 12% contraction in meat export volumes also contributed to weaker October exports, although this comes after strong growth in meat volumes since May. On the imports side of the ledger Turner said the 8% seasonally adjusted October fall appears to be led by lower fuel imports, which can be volatile on a monthly basis given they're affected by the timing of shipments. Excluding fuel, seasonally-adjusted imports fell 5%.
"Imports of consumer and capital expenditure goods have grown strongly over the past year, up 6.2% and 14% respectively on year-ago levels. This growth reflects the gradual recovery in New Zealand domestic demand over the past year," said Turner. See full details from Stats NZ here.
NZ dollar head wind & impact of Christchurch rebuild imports could see deficit widen
Overall Turner said conditions for exporters have been challenging with global demand falling over 2012 and the New Zealand dollar remaining strong.
"We (ASB's economists) expect to see some improvement in demand conditions over 2013, along with some recovery in commodity prices as the effects of the US drought start to flow through to meat and dairy prices. However, the NZ dollar will remain a head wind on NZ dollar returns," she added.
In their note Westpac economists suggested increasing Canterbury earthquake-related imports, such as construction machinery and equipment, will dominate improving export prices over the next 18 months resulting in the trade deficit widening.
BNZ sees current account deficit 'piercing through 6% of GDP' next year
BNZ economist Doug Steel said he expects the current account deficit to widen to 5.5% of GDP in calendar year 2012, from 4.9% in the year to June 2012.
"We see further deterioration ahead with the current account deficit expected to pierce through 6% during 2013," said Steel.
"Part of this view reflects weaker export volumes following the past year’s pastoral driven strength and limited price gains in the face of ongoing strength in the NZ dollar. The view also reflects some import growth on the back of expected economic growth and improving domestic conditions including what we have already seen in the property market."
Steel said BNZ's economists continued to wonder how wide the external deficits have to get before the financial markets and credit rating agencies take notice.
"The stark contrast between the 11% decline in export values over the past year and the 33% lift in house sales provide a vivid illustration of the current imbalances. Cue broken record: beware the deteriorating external accounts," said Steel.
(Updated with comments from BNZ economist Doug Steel, ASB' economist Jane Turner & comment from Westpac economists).